Is the credit crunch easing?
By Fergal Barry-Murphy. Published on April 25, 2008 This post currently has no comments.
By now, very few people in the UK remain unaffected by the global credit crunch. While many commentators believe that we have a long way to go before things return to normal, others believe that an end may be in sight.
Since the beginning of the year both banks and governments world have accepted the fact that the global credit crunch will not go away overnight, or indeed, in a matter of weeks. For this reason we have seen number of significant steps in recent weeks that genuinely work towards finding a solution for the world’s debt problems.
By now, the causes and effects of the credit crunch have been well documented. Put simply, the root of the problem lies in the fact that the banks do not want to lend to each other because nobody knows who will bear the brunt of the costs of the sub-prime mortgage of the crisis in the United States. This reluctance to lend has meant it has become difficult for individuals and businesses to borrow money, which of course has a detrimental affect on growth and the economy.
So far, we have seen banks announcing losses of billions of pounds because of the crisis and the Bank of England had to bail Northern Rock out of trouble late last year. Now, the BoE has gone a step further by loaning a massive £50 billion to banks to ease liquidity problems. This basically involves financial institutions swapping their mortgage and credit card assets for Treasury bills.
The Bank also hopes to kick start lending among banks by the lowering of the LIBOR rate - the rate at which banks lend to each other. This £50 billion figure is expected to double in the coming months and if the BoE’s move is effective credit should become more easily available at all levels in the coming months.
Perhaps more significantly, the banks themselves are moving to ease the crisis. RBS, for example, is “coming clean” over its exposure to sub-prime losses as part of its rights issue plans. It has publicly revealed the extent of the damage caused by the current crisis and asked shareholders to help bridge the shortfall.
Now, other banks are expected to follow suit. Great transparency about potential losses will rebuild trust between banks, increasing their willingness to lend to each other, making more funds available for mortgages and business loans.
These recent moves can be seen as an admission by all parties that a long-term approach needs to be taken to tackle the credit crunch. First and foremost, these measures should help prevent a serious recession. However, we could also see some positive signs in the coming months and perhaps an easing of lending criteria.
So, we are probably not at the bottom of the crunch yet, but the moves by the BoE and RBS could signal a light at the end of a long tunnel.
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